GoPro Inc. Company Analysis

! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

Zach Wielgus | Patrick Goncalves! Accounting, Summer 2015! Professor Mark Crowley!

I. Company Background and Strategy

!

Nick Woodman founded GoPro, Inc in 2002 after he saw a need for portable, durable, high definition cameras to capture surfing footage. The company is headquartered in San Mateo, California, and sells its products through retailers, wholesale distributors, and globally via its website. The company owns the trademarks “GoPro” and “Be a Hero.” GoPro is the high definition action camera of choice for sports enthusiasts who want to share their footage on social media. The company also sells many selections of mounts designed to enable consumers to capture content while engaged in their activities; popular equipmentbased mounts include the helmet, handlebar, roll bar, and tripod. Additionally, GoPro enhances its products by offering software solutions that make it easier for consumers to manage, edit, and share their content from its Hero devices. As a consumer electronics product, GoPro faces immense competition from manufactures such as Canon, Nikon, Olympus, as well as larger diversified electronic companies such as Garmin, JVC, Panasonic, Samsung, Sony, and Toshiba. In 2013, GoPro’s share of the U.S. camcorder market was 45 percent compared to 11 percent from two years earlier. The company went public in June 2014 at $24 a share; the share price rose 31 percent on its first day, and within its first week that price had more than doubled. Despite the plethora of competitors in the portable video space, GoPro represents the rise of a new consumer gadget brand, and has managed to solidify a sizable segment in the market. To secure growth, GoPro is working to expand internationally, constantly innovating new features in its cameras while gaining continual leverage through their enormously successful branding efforts, which are centered on infiltrating the user experience. Case in point: In the last

10 months, GoPro has released five new cameras; a new custom lens; audio, battery, and accessory designs for existing cameras; and is also developing custom sensor and digital signal processing technologies. Lastly, in October 2013 GoPro acquired General Things Inc., a web development firm, to further extend and develop new product offerings within video software category. It is also dipping its toe in the virtual reality market, a highly innovative wearable technology that has drawn interest from both Facebook and Google. GoPro’s worldwide success has been due in large part to the company’s strategic efforts in scaling as a media brand. It has increased its consumer awareness by entering into new vertical markets, which has led to international expansion. Additionally, the company has established beneficial marketing relationships with dozens of athletes, celebrities, and musicians; they have also found a foothold as prominent sponsors at The X Games, Supercross championships, and ASP world surfing championships. Beyond their camera products, GoPro is a content platform, publishing content through its own GoPro and YouTube Channels. Content is produced in partnership with other big name brands such as Xbox and LG, then strategically curated to reinforce GoPro’s position as a lifestyle brand. Reinforcing its identity as a lifestyle brand helps stave off competitors. For instance, Sony’s 4K action cam and Polaroid’s new action cam, the Cube, are both newly developed products that pose a threat to GoPro’s market share; to curb the competition, GoPro has recently released its lower-end Hero camera, at $129.99. Despite offering a less expensive product, GoPro’s appeal with the thrill-seeking culture and the company’s mission, “Storytelling for everyone,” is arguably the company’s greatest competitive advantage.



II. Comparative Ratio Analysis of GoPro, Inc. and its competitors

! ! ! ! ! ! ! ! ! ! ! !

*S&P Net Advantage

The company’s 2015 first and second quarter earnings are up approximately 65 percent, which far exceeded Wall Street’s estimates, and its second quarter continues GoPro’s streak of besting Wall Street’s estimates in every quarter since the company’s IPO in June 2014.

! ! ! ! ! ! *S&P Net Advantage

The company reported earnings of $0.24 per share on sales of $420 million for the quarter compared to earnings of -$0.24 per share on $244 million in revenue from the same period last year. It is forecasted to climb all the way up to $1.82 by the fourth quarter.

! GoPro, Inc. (GPRO)

2014

2013

S&P AVG

Sales in Millions

1,394

986

20,984

Profit in Millions

128

60.6

1929

Net Profit %

9.19%

6.1%

9.2%

Market Cap (Millions)

$5,022

$38,005

$61.68 (as of July 22, 2015)

$86

Stock Price PE Ratio

55.1 (12 month trailing)

Nil

25

$0.92

$0.54

3.73

6.1

Nil

1.81

ROA

18.9

17.7

7.4%

ROE

NIL

NM

19.1%

Dividend/Share

NIL

Nil

$1.32

EPS Price/Sales

Institutional % Beta! Gross Income (Millions) Current Ratio Total Asset Turnover

33%

81%

NA

1

627.24

361.8

3.2 2.05 *S&P Net Advantage

Because GoPro, Inc. did not go public until June 2014, there is little data from recent history to display change; however, performance through its second quarter of the 2015 fiscal year demonstrate impressive growth, which will be enumerated in Section III. Despite limited statements with which to compare, there are important numbers in the above table. What is most obvious is GoPro’s serious growth in only one year. The company’s sales increased by 41 percent, its profit by an incredible 111 percent, and its Earnings Per Share by 70 percent. The revenue increase is largely attributed to the launch of its Hero4 platform, its newest

camera that was met with great demand. The rapid rise seen in this data is affirmed by GoPro’s growing presence in popular culture. What started with skateboarding, surfing, and snowboarding athletes filming cool tricks permeated into the novice community, with the everyday teenager emulating his favorite extreme sport athlete with a GoPro reel of his own. “GoPro” is a universally recognized term, associated with the mounted camera on a helmet or bike – to enter the cultural vernacular is an intangible but incredible asset, and certainly matches up with the rise from zero revenue in 2009. The counterargument to GoPro’s precipitous rise is that it is overvalued. An extremely high Price/Sales (6.1 to the S&P Average of 1.81) and a P/E ratio (55.1 compared to S&P average of 25) both point to the cautionary tale of potentially overvalued. GoPro’s stock price has more than doubled in one calendar year, despite its relatively recent burst onto the consumer scene. It also has yet to register any dividends, with a potential reason shown through its Current Ratio of 3.2 – again, very high when a ratio of 2 is considered “conservative.” Because the company has not issued any dividends, it is natural to have an excess of current assets. It is possible that GoPro feels the need to hold on to its cash if the market dips or, more disastrously, it begins to fade into irrelevancy. Lastly, a reported Beta of NA, while without value, indicates an extremely risky and volatile company. An optimistic investor will view these numbers quite differently than a pessimistic investor, which is what makes GoPro such an intriguing stock.

! ! ! !

! GoPro 2014

Skullcandy 2014

Sales in Millions

1,394

247

Profit in Millions

128

7.6

Net Profit %

9.19%

3.1%

Market Cap (in M)

5,002

202

Stock Price

$61.68

$7.27

PE Ratio

55.1

28

EPS

$1.12

$0.27

Price/Sales

6.1

26.9

ROA

18.9%

4.0%

ROE

NM

8.0%

Dividend/Share

Nil

Nil

Institutional %

33%

70%

Beta

NA

1.49 *S&P Net Advantage

Take a look at two competitors of GoPro in various parts of related industries to further confirm that GoPro’s growth rate is not a byproduct of a booming industry. Skullcandy, which was founded one year earlier than GoPro and manufactures similar consumer electronics like headphones and hands-free devices, displays numbers that pale in comparison. While current culture – and especially the Millenial generation – both craves new ways to create and share videos and wants convenient technology, it is not a rising tide lifting all boats. Skullcandy substantially lags behind GoPro in profit (it reported just 5% of GoPro’s profit in 2014), yet still suffers the same measure of volatility with a high beta.


Of course, one could easily argue that Skullcandy is a small player with the likes of camera manufacturers, such as Canon and Nikon, and diversified electronics companies, such as Samsung and Sony, more apt competitors. The next table offers a comparison to Sony, which, as mentioned in Section I, entered the wearable camera market. It comes as no surprise that Sony is a much larger company and dwarfs GoPro in sales; after all, Sony sells myriad forms of technology, not merely camera equipment. What is most interesting is Sony’s clear struggle in profit, institutional percentage, and beta. McGraw Hill Financial assesses the consumer electronics industry as one that is noticeably over-saturated. Flat-screen televisions are common, while the new Ultra HD TVs are priced above what the average consumer can afford. Smartphones are becoming all-in-one packages, equipped with sharp cameras, reliable video recording software, music players, and high-resolution screens. As a result, a massive company like Sony reported negative profit and a stock price below $30 last year. Additionally, factors like its 9 percentage institutional ownership percentage and very low Price/Sales indicates a lack of eager investors, and partially proving the consumer electronics industry isn’t experiencing rapid growth across the board. What this creates is an opening for an innovative product – wearable technology pioneered by GoPro; however, analysts and investors are not yet sure if people will embrace strapping a camera to their head. For instance, for all the money that was poured into Google Glass, it is largely viewed as a bust because nobody wants to wear it. The fear of “another Google Glass” and the uncertainty of the popularity of wearable technology offer one insight into a huge PE ratio and volatile beta, but that GoPro has found an innovative niche in an otherwise

flat consumer electronics industry demonstrates why there is so much excitement and investing surrounding the company.

! III. Stock Recommendation To answer the question as to whether GoPro is a good buy, one must look at the company’s recent activity and analyze key metrics that constitute future growth. An interesting factor to note is the company’s PE ratio, currently at 53.37, is more than double the current S&P average of 21.08. A variance of this magnitude could constitute GoPro as not being “buy worthy,” but what counterbalances is that the company’s earnings are trending upward. According to the company’s second quarter reports, revenue increased 72 percent yearover-year to $420 million; EMEA (Europe, Middle East & Africa) and APAC (Asia-Pacific) sales combined to over 125 percent growth year-over-year. In contrast to similarly new but risky Twitter and its negative earnings (PE ratio: -39), GoPro has multiple revenue streams that wield the stock to thrive in the positive. One could argue that GoPro’s marketing and branding prowess has been successful in playing on the emotions of investors, causing their stock price to be disproportionate to their earning with respect to PE ratio. That is just how GoPro operates: an extreme lifestyle branding company that happens to make the most acclaimed lifestyle camera.

! !

!

Currently (August 2015), GoPro stock has been leveling out after a substantial 10-point

rise in early July. Even though the leveling has occurred after an impressive second quarter, GoPro’s growth looks promising. GoPro’s innovative efforts have positioned the company as players in four “megatrends:” drones, wearables, virtual reality, and connected applications. In addition, the company shipped 1.6 million capture devices in Q2’15, which puts the company up 93 percent year-over-year. Further, GoPro’s ubiquitous brand continues to make headway, as they recently became the official camera of Tour de France. With a year of strong growth trends, newly developed products, and continued expansion both globally and in the branding space, GoPro offers evidence that it is a stock on the rise, not merely a flash in the pan.

! ! !

Conclusion: As a testament to Nick Woodman’s vision to inspire the world to tell their story, GoPro has become an $8 billion company. GoPro’s success is undoubtedly due to their focus in becoming a lifestyle branding company first, and a camera manufacturing company second. The GoPro culture has taken the world by storm, and their cameras have been right there to catch it.

! ! ! ! ! ! ! ! ! ! !